Dr Ala’a Shehabi
Economies across the world are on course to face the worst fall in GDP figures since 2008. In the UK, GDP fell by 10.4% in the first three months of 2020, and a whopping 20.4% in the month of April, the largest fall since records began in 1997. The Bank of England predicts that GDP will fall by 14% this year, probably more. The IMF has revised downward its forecast for global economic growth from -3% to -4.9% this year.
This is scary. But these GDP figures also hide the deep inequalities that our economic system produces. It confuses the growth of markets and prices with prosperity and value. It is assumed that if we make, consume and sell more things, our welfare and life quality improves. Is this true?
Governments all over the world still mostly rely on the use of GDP for economic planning and to set monetary and fiscal policy. Companies, meanwhile, use it to make investment decisions: choosing who to hire, what to build, borrowing ability, interest rates. Whatever the economy’s recovery looks like – U, a V, W or Nike swoosh – GDP is the main metric that will be tracked, reported and acted on, with enormous implication for our lives.
GDP was itself borne in times of crisis, just after the first world war. Even its inventor, the progressive economist Stephen Kuznets, understood its severe limitations. When tasked with finding a way of measuring total national income, he said: “The welfare of a nation can … scarcely be inferred from a measurement of national income”. Since then, the case against GDP has been made over and over again, particularly after the 2007 financial crash, which demonstrated that macroeconomic data and models failed to reflect the reality of the economy. So why do we still use it?
Dr Ala'a Shehabi is the Deputy Director of the Institute for Global Prosperity.
Image credit: Patricia Gabalova
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